How Rent Controls Hurt the Poor

Mr. Brownfeld of Alexandria, Virginia , is a free-lance author, editor and lecturer especi­ally interested in political science.

It is an unfortunate fact of life that government involvement in the economy is always initiated in "the public interest," and always ends up helping not the "public," but some smaller private concern.

Through the Civil Aeronautics Board, government was going to re­gulate the airlines in behalf of the American people. The result has been "regulation" against the pub­lic interest. Not one new airline has been permitted by the govern­ment to engage in interstate com­merce since the CAB was created. Air fares in interstate commerce —controlled by the CAB — are far higher than air fares within a given state, not controlled by the CAB. It is clear that the regulators regulate not in behalf of the public but in behalf of the airlines.

A similar story is now unfolding with regard to government im­posed rent controls in a variety of cities and states. The stated reason for the imposition of rent controls is to protect the poor from exorbi­tant rent increases by allegedly "greedy" landlords. The result —unexpected by those who have initiated such programs but viewed as almost inevitable by those who understand the dangers of govern­ment attempts at economic mani­pulation — is that the poor are finding it difficult to locate a place to live. The rental market is shrink­ing dramatically, and men and wo­men are being forced out of the homes in which they have lived for many years.

A recent front page article in The New York Times (September 28, 1974) discussed the case of Kathleen M. Jackson, a retired college professor who had lived in a quiet old building on Connecti­cut Avenue in Washington, D.C. for 14 years. Suddenly she was given the option of buying her apartment or moving out. Her new landlords, citing a backbreak­ing interest rate, an expensive re­novation program, and a belief that residential properties are no longer attractive investments, had announced plans to convert their units into condominiums.

Miss Jackson never seriously considered buying her apartment. The price would have been $40,000 which involved a $2,000 down payment and, if she could get a loan, mortgage payments, taxes, and operating expenses of $422.50 a month. The rent had previously been $155. Where she will live in the future is not yet clear. That her situation is becoming com­monplace in our large cities is much clearer.

By last June 30, according to estimates of the Metropolitan Washington Council of Govern­ments, 20,618 apartments in the area had been converted from ren­tal to condominium units. There were 572 conversions in 1971, 3,563 in 1972, 8,439 in 1973, and 4,923 in the first half of 1974. New construction, meanwhile, has pro­duced more than 24,000 additional units.

In 1970, 87 per cent of the area’s new multifamily housing was rental and 12 per cent was con­dominium; this year the figures are reversed: 86 per cent is con­dominium and 13 per cent is rental.

Restricting the Supply

The Wall Street Journal of October 4, 1974 declared that, "In many areas, the conversion of ex­isting apartments to condomin­iums has . . . constricted the sup­ply of units available for rental." In its Fall, 1974 survey of 20 ma­jor markets, Advance Mortgage Corporation, a large mortgage banking concern and subsidiary of Citicorp, found that the apart­ment vacancies in the majority of these areas were continuing to vanish. The Houston market, for example, was one of the softest in the nation in 1973 with about 17 per cent of its units vacant. By late in 1974 the vacancy rate was 9 per cent and falling "at a rate of one per cent a month," accord­ing to Philip L. Hendershot, a vice president of Advance Mort­gage.

The effect of this state of af­fairs may be more serious than many imagine at this time. "Peo­ple will have to be doubling up, living more with relatives," says Robert Sheehan, director of eco­nomics for the National Associa­tion of Home Builders. The fastest formation of households will be by people in the 30-44 year old age group, reflecting the "baby boom" after World War II. Mr. Sheehan predicts that this group will in­crease its rate of forming house­holds to about 650,000 annually by 1980 from approximately 225,­000 a year at present.

Less Rental Housing

Predictions have it that within 20 years half of the nation’s pop­ulation will live in condominiums — a prediction which implies a shift in housing patterns so vast as to require wholesale conversions throughout the country. David Clurman, an Assistant Attorney General in New York and a lead­ing condominium authority, states that, "I think the time will come when most of the soundly built, well-situated buildings in the United States will be converted." (New York Times, September 28, 1974.)

The reason for the destruction of the rental housing market — a market of importance to the na­tion’s poorer families — is clearly government economic interven­tion. U.S. News and World Report declared in its June 24, 1974 issue that condominiums were replacing rental housing because "Landlords fed up with tenant complaints and with rent control or the threat of control often find conversion … an attractive way out."

Today, more and more, inves­tors regard the risks of rental pro­perty as no longer acceptable. Taxes, utility bills and labor costs are soaring, they complain, while rent controls either hold down in­come or threaten to do so.

In New York City, which has long had rent controls, the plight of the poor in seeking housing is probably the worst in the nation. The rental vacancy rate is below 1 per cent and private building is at a near paralysis. Richard Stone, writing in The Wall Street Jour­nal in 1971, notes that, "Increas­ing numbers of landlords simply give up, abandoning buildings they can neither afford to maintain nor sell at any price. Tenants, left with no heat, water or electricity, va­cate such buildings in a matter of days. When that happens, blight swallows up whole neighborhoods, almost overnight. Every day there are fewer housing units available in New York City than the day before. New York ‘s archaic rent-control law keeps the marginally poor whose fortune is improving from moving out of slum neigh­borhoods."

Economically Irrational

In his important book, A Hu­mane Economy, Wilhelm Röpke points to rent control as an exam­ple of an "economic policy" which tends to be "irrational, that is, determined by what is ‘politically feasible’ rather than by what is economically rational and just."

He calls rent controls "irratio­nal, ill-considered and at the same time unsocial and inequitable." Röpke notes that, "Rent control is really nothing but the protection of one privileged special kind of tenants, those with old leases, at the expense of the landlords and later tenants alike. Yet it persists, and the explanation is no doubt that, on the one hand, it does need a little reflection and intelligence to see its full implications and that, on the other hand, politicians are afraid to denounce this object of cheap demagogy."

The entire philosophy of coer­cive government controls on rent may satisfy the statist predilec­tions of some politicians and eco­nomists, but surely adds to the burden of the poor — those they were meant to help.

"Rent ceilings," declares eco­nomist Milton Friedman, "cause haphazard and arbitrary allocation of space, inefficient use of space, retardation of new construction. The legal ceilings on rents are the reason there are so few places for rent. Because of the excess of de­mand over supply, rental property is now rationed [in New York] by various forms of chance or fa­voritism. As long as the shortage created by rent ceilings remains, there will be a clamor for contin­ued rent controls. This is perhaps the strongest indictment of ceil­ings on rent. They, and the accompanying shortage of dwellings to rent, perpetuate themselves, and the progeny is even less attractive than the parents." (Newsweek, March 22, 1971.)

Those who are really concerned about proper housing for the poor should seek to stimulate private investment in rental housing, not retard it.

Rent controls do the poor — and all of us — significant harm. It is one more example of the manner in which government intervention in the economy hurts the very people in whose name such inter­vention was initially undertaken. When the politicians finally learn this lesson, some hope for an improvement in the housing market will become possible — but not un­til then.

THE FREEMAN

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December 2014

Unfortunately, educating people about phenomena that are counterintuitive, not-so-easy to remember, and suggest our individual lack of human control (for starters) can seem like an uphill battle in the war of ideas. So we sally forth into a kind of wilderness, an economic fairyland. We are myth busters in a world where people crave myths more than reality. Why do they so readily embrace untruth? Primarily because the immediate costs of doing so are so low and the psychic benefits are so high.